Facts of the Case

The respondent-assessee (M/s. Oswal Chemical & Fertilisers Ltd.) filed its return of income for multiple assessment years claiming depreciation on certain plant and machinery purchased for an amount of ₹6.97 crores from a supplier, M/s. Bermaco Industries Ltd. The original assessment was completed under Section 143(3) of the Income Tax Act, 1961, allowing the depreciation. Subsequently, the Assessing Officer (AO) issued a reassessment notice under Section 148 based on a statement from the representative of the supplier and certain findings from the Settlement Commission claiming that the machinery was never supplied, classifying the transaction as a bogus purchase, and consequently deleting the depreciation. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) reversed the AO’s reassessment order on the grounds that the AO failed to provide an opportunity for cross-examination and did not perform physical on-site verification of the assets despite the assessee’s requests. The Revenue filed appeals before the High Court against these findings.

Issues Involved

  • Whether the Income Tax Appellate Tribunal was legally justified in dismissing the Revenue's reassessment order that disallowed depreciation under Section 32 on the ground that the machinery transaction was a bogus accommodation entry.
  • Whether a reassessment based on third-party statements can be sustained if the Assessing Officer fails to grant the assessee an opportunity to cross-examine the third party and fails to perform a physical verification of the assets.

Petitioner’s (Revenue's) Arguments

  • The Senior Standing Counsel for the Revenue argued that the reassessment was based on clear evidence including the statement of the supplier's representative confirming that the machinery was not supplied.
  • It was contended that since the supplier approached the Settlement Commission and accepted that the machinery was not delivered, the transaction was clearly an accommodation entry, making the assessee ineligible for depreciation under Section 32.

Respondent’s (Assessee's) Arguments

  • The Senior Counsel for the respondent argued that the original allowance of depreciation was fully justified as the machinery was genuine.
  • The assessee contended that the reassessment order violated the principles of natural justice because the AO relied heavily on a third-party statement without granting the assessee an opportunity to cross-examine the witness.
  • It was further argued that despite explicit requests, the Income Tax Department failed to provide relevant investigative documents or perform an on-the-spot physical verification of the existing block of assets to prove non-existence.

Court Order / Findings

The High Court of Delhi observed that the primary question of law in these connected appeals (ITAS No. 1093/2009, 1091/2009, and 1094/2009) directly related to the depreciation on the machinery purchased for different assessment years. The Court found that the underlying issue and reasoning were identical to those in the lead matter, ITA No. 1092/2009. Adopting the detailed grounds and reasons stated in ITA No. 1092/2009 (where the revenue's reassessment actions were found flawed due to procedural lapses and denial of cross-examination), the Division Bench comprising Hon’ble Mr. Justice A.K. Sikri and Hon’ble Mr. Justice M.L. Mehta dismissed all the appeals along with any pending applications.

Important Clarification

The ruling reinforces that when an assessment is reopened under Section 147/148 based on third-party evidence or statements, the Revenue cannot make additions or disallow claims without adhering to the principles of natural justice. Failing to offer the right of cross-examination to the assessee and failing to execute objective inquiries, such as physical verification of assets, weakens the evidentiary value of the revenue's findings, leading to the dismissal of their appeals.

Sections Involved

  • Section 32 of the Income Tax Act, 1961 (Depreciation on Tangible/Intangible Assets)
  • Section 143(3) of the Income Tax Act, 1961 (Scrutiny Assessment)
  • Section 147 / 148 of the Income Tax Act, 1961 (Income Escaping Assessment / Reassessment Notice)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:11485-DB/AKS23032011ITA10912009_103641.pdf

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